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Jeff Jacoby’s recent Boston Globe column [“Price gouging’ during natural disasters isn’t a problem — it’s a solution”] neatly illustrates the dilemma of conservative political commentators in the Trump Era. Jacoby’s endorsement of price gouging is a freshman Econ 101 essay that relies entirely on classical economic theory. It contains absolutely no empirical evidence whatsoever, nor does it include any of the inconvenient insights that econ majors confront in their upper-level coursework (especially if they take that behavioral econ elective).
In a nutshell, Jacoby is arguing that banning dramatic, short-term price increases for basic necessities during an emergency will deprive people of vital information about the supply of and demand for needed goods at a time when accurate information of this kind could be the difference between life and death. Is that true? Are the prices of consumer goods really irreplaceable signals to consumers about urgent, potentially life-saving decisions they should be making in the face of natural disasters?
According to Jacoby, “Price controls are always bad policy, because they interfere with the free flow of accurate information about market conditions — information that countless buyers, sellers, suppliers, and consumers rely on to make economic decisions.” At least he admits they are “countless.” He continues: “[w]hen the price of bottled water more than doubles overnight, it isn’t because of a storekeeper’s whim. It is how the market communicates that a vital product is about to become much more scarce.” Is a guy selling bottled water out of the back of a van a “storekeeper?”
Are you following Jacoby’s logic? If not, don’t worry about it unless you are planning to engage in a theoretical debate about price controls with an economist. Jacoby goes on, “[p]rices aren’t arbitrary. They’re signals. Every price conveys a message about supply and demand, just as every thermometer reading conveys a message about heat and cold.” Could bans on price gouging really dangerously misinform victims of natural disasters the same way a broken thermometer might dangerously misinform people battling extreme temperatures? Unable to produce any empirical evidence, Jacoby clearly needed a compelling analogy. In this case, one intended to convince readers that market price changes communicated by sellers to consumers are as natural as air temperature changes communicated by thermometers.
Do you get it now? If not, don’t worry because in real life sellers rarely operate like thermometers. The badly strained analogy is actually just evidence of Jacoby’s increasingly awkward plight as a conservative political commentator in the Trump Era.
Jacoby’s political perspective is taking a massive beating every single day by reality. The Trump presidency and takeover of the Republican Party isn’t just a theoretical challenge to most of what Jacoby has advocated for decades, if it were only that, he would surely be mounting a defense that includes empirical evidence. Instead, Jacoby is retreating into one of the very few expert domains where his worldview hasn’t yet been toppled. The classical economic theory that Jacoby is relying on to affect the intellectual high-ground is itself no longer going unchallenged by academic economists. Observed reality has and is producing serious challenges to the assumptions of conservative political commentators and conservative economic theorists. The accuracy of the rationality assumption at the core of classical economic theory is being seriously questioned by the findings of social scientists from multiple disciplines wielding mountains of empirical evidence that reveals the folly of Jacoby’s pricing-thermometer analogy.
The theories that poor Mr. Jacoby is presenting as facts are not bad theories per se, which is why they remain central in the education and practice of economists, as well as those attempting to solve real life problems, including the economists who devises price controls. These theories remain important and useful to economists and public policy makers alike because like all theories, their function is not to describe reality, it is to provide an abstract model to which social scientists can compare real world behavior. This is just one of the tools social scientists use to better and more precisely understand human behavior. Theory merely informs real world problem solving. It doesn’t dictate solutions. To be fair, I don’t actually know if Jacoby understands this distinction or not, though I am assuming he does. 😉
Being a conservative in the Trump Era is understandably difficult, especially when you make your living advocating for conservative ideas and policies in the newspaper. Understandable too is Jacoby’s effort to hide behind classical economic theory, which provides a veneer of intellectual sophistication and credibility that is increasingly hard to come by for conservatives in the Trump Era. Nonetheless, I am obliged to point out that Jacoby’s appeal to intellectual authority is actually an appeal to an admittedly popular, yet clear, misunderstanding of the relationship between theories and facts, between theoretical and applied economics.
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